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Stablecoins in Danger After LUNA Crypto Disaster

After the LUNA event, tens of billions of dollars evaporated from the stablecoin matrix. Regulators and users have more doubts about this asset class.

As the type that has grown rapidly in the last 3 years in the cryptocurrency market, stablecoins support the decentralized financial ecosystem and make transactions more convenient. At its peak, the total market capitalization of stablecoins was around $186 billion.

However, with the collapse of UST (TerraUSD), the algorithmic stablecoin of the LUNA ecosystem, the market and authorities have taken a more cautious view of this asset class. At the same time, many stablecoins failed to reach the $1 mark, the market capitalization fell deeply recently.

Many stablecoins are no longer stable
Stablecoins are trusted because they guarantee a price hold with the pegged fiat currency. After the UST/LUNA crash, investor confidence in this asset class is somewhat affected as a $1 stablecoin may not equal $1. In just one week, over $20 billion has been evaporated from the stablecoin market.

The secondary effect of UST events affects Waves USDN or Kava USDX. Both stablecoins fell sharply from the $1 mark. Specifically, on May 12, the price of USDN was only 0.75 USD/dong, USDX was 0.51 USD/dong. Additionally, Kava’s USDX stablecoin has multiple USTs as a reserve asset. Due to the deep collapse of UST, this project is also “in work”, almost 10 days have passed and USDX has not been able to touch the 1 USD mark again.

The collapse of UST also had an impact on USN, USDD, algorithmic stablecoins with a similar model that were launched not too long ago. Justin Sun, founder of TRON, the project that runs USDD, said that his stablecoin is the next target after UST. However, this organization has prepared billions of dollars to deal with financial attacks.

At the same time, USDT, the largest stablecoin on the market, backed by real assets, also took a hit. For the first time in over a year, USDT fell to $0.97. Furthermore, from May 13 until now, this stablecoin has failed to recapture the $1 mark.

The issue that caused the aforementioned stablecoins to crash is due to user mistrust. Although backed by real assets, USDT is a partially backed stablecoin. This means that more than 79 billion USDT in circulation is not backed by 79 billion USD. Tether, the company that manages the stablecoin, uses depositors’ funds to invest in a variety of items, keeping only a portion to pay when a withdrawal is requested.

This has raised concerns in the community that Tether investments could struggle during tough economic times. As a result, the assets of the company are not sufficient to support USDT. In just one week, the USDT market cap has shrunk by nearly $8 billion. This flow goes to USDC and BUSD, fully supported stablecoins.

Legal obstacles
In light of the recent stablecoin incidents, regulators in many countries have not taken a favorable view of the asset class.

In July 2021, US Treasury Secretary Janet Yellen called a meeting with the chairman of the Federal Reserve Board (FED), the head of the Securities and Exchange Commission (SEC), and six other persons. caucus officials, discussing the Tether (USDT) stablecoin. This cryptocurrency could cause inflation, putting US finances at risk.

CNBC host Jim Cramer has also advised investors to sell all of their crypto. “If Tether fails, this stablecoin will destroy the entire crypto ecosystem,” Jim said.

On May 10, when the deep drop occurred, during a hearing before the US Senate Banking Committee, Janet Yellen mentioned the TerraUSD decoupling event (missing $1 anchor mark). She said that could affect the financial stability of the US and called for a stablecoin regulatory framework to be put in place to oversee the sector.

“There is a stablecoin called TerraUSD that has been active and its value is declining. She clearly illustrates that stablecoins are growing rapidly and present risks to the stability of the financial industry. We need a stable currency. appropriate regulatory framework,” said Ms. Yellen.

According to Reuters, during the meeting of the new G7 group in Germany, the financial leaders of the main

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